When the Rich Don’t Pay, the Rest of Us Do

Over 30 years ago, a real estate bigwig in Manhattan (no, not him) was convicted of tax evasion. Her name was Leona Helmsley, the famous Queen of Mean. Even more famous, lasting approximately forever, were six words she let slip: “Only the little people pay taxes.”

The words are far from true—the big people have always paid the lion’s share of taxes—but they point to a truth that’s finally getting the attention it deserves. Here it is, in a different six words:

The big people hugely evade taxes.

They consistently and significantly under-report their incomes. According to The Internal Revenue Service, they’re by far the biggest contributors to a tax gap approaching $600 billion a year. (The gap is the difference between taxes owed and taxes paid, and it’s long been out of control.)

Even more damning, the latest research has turned up a link between incomes and levels of tax evasion: the more money the rich make, the more they cheat.

Those in the top fifth generally fail to report 10% of their incomes. The unreported percentage climbs with incomes, hitting 20% or more for those in the top 5%.

The biggest thieves of all occupy the top sliver, the top 1%. In general they cheat the Treasury by not reporting between 25 and 30 percent of their real intake. (Sarcastic props to those in the top .01%; they’re so trustworthy, they only under-report by about 15%.)

Let’s translate those numbers into dollars. America’s richest 1% have an average annual income of about $1.7 million. Not according to their tax returns, though—the incomes they report are short on average by $425,000 to over half a million.

It’s highway robbery by the rich. As the researchers calculated, “Fully collecting the unpaid taxes of the top 1% would increase income tax revenue by an amount equivalent to 10.1% of the aggregate amount actually collected. For example, it would have increased tax revenue by $173 billion in 2019…”

The cheaters cheat because the system inherently encourages them and lets them get away with it. They self-report their incomes; they decide what numbers to enter on their tax returns, and the IRS effectively has to accept them. Audit rates, always low, have been driven even lower by a Republican hatchet job on the agency’s budgets. The number of auditors is similar to the totals in the 1950s, “when the economy was a seventh of its current size.”

Self-reporters include millions of sole proprietorships, partnerships, limited liability companies and S-corporations. The vast majority of workers—Helmsley’s little people—live in a totally different tax world. Their incomes are automatically reported by the companies they work for. As their W-2s and 1099s warningly remind them, “This information is being reported to the Internal Revenue Service.”

At long last—in what would be a major breakthrough—the work income of rich tax cheats could be in for similar treatment. They could get their own 1099s, listing income information supplied by the banks they use. And, yes, the same information would be shared with the IRS. These new and special 1099 forms are a key component of the IRS Enhancement and Tax Gap Reduction Act, reintroduced in February by Rep. Peter DeFazio (D-OR)

The bill adopts the central conclusions of a definitive 2020 analysis by former IRS commissioner Charles O. Rossotti. Since most of the tax gap stems “from income that’s not reported to the IRS by third parties,” the No. 1 priority is obtaining and verifying those numbers. The bill would also “significantly increase IRS funding levels over the next decade” to help the agency narrow the gap and better carry out its overall mission.

The new 1099s would go to upper-tier taxpayers with income “from low-visibility sources.” In practice this would mean “about 5% of all individual filers and about 20% of those with sole proprietor incomes.” Self-reporters with modest incomes would not face any additional scrutiny.

Here’s to a long-overdue income reporting reform. If it passes, if it works, the IRS may finally know as much about the big people as it’s known about the little people for over 75 years.

The rewards would be huge. According to DeFazio, “the average U.S. household is paying more than $3,000 annually to subsidize taxpayers who aren’t paying all that they owe.”

• This article first appeared at www.nydailynews.com

Gerald E. Scorse helped pass a bill that tightens the rules for reporting capital gains. He usually writes on taxes. Gerald can be reached at: scorse@gmail.com. Read other articles by Gerald.